CBS and Viacom Start 2019 With Some Good News

By

Nicholas Jasinski

Jan. 2, 2019 12:13 pm ET

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Photograph by Angela Weiss/AFP/Getty Images

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Mergers have been the name of the game in the media industry over the past year. Under pressure from cord-cutting in favor of
Netflix
(NFLX) or
Amazon.com
’s (AMZN) Prime, several traditional players chose to bulk up or join forces in 2018.

Count
AT&T
(T)-Time Warner,
Walt Disney
(DIS)-most of
21st Century Fox
(FOXA),
Comcast
(CMCSA)-Sky (SKY.UK), and Discovery (DISCA)-Scripps Networks as just some of the high-profile combinations that closed last year or are in their final stages of approval.

One potential merger that saw plenty of action but never crossed the finish line:
CBS
(CBS) and
Viacom
(VIAB). The two companies split in 2006, and both remain majority controlled by the Redstone family’s National Amusements.

But both senior management teams had other issues on their minds in 2018. CBS remains without a permanent leader following the departure of longtime CEO and Chairman Les Moonves, who resigned after allegations of sexual misconduct. Viacom has been focused on turning around its money-losing Paramount Pictures film studio while managing declines in viewership and advertising spending on its cable networks.

Merger or not, both companies deserve a closer look, wrote two separate teams of analysts who cover the stocks on Wednesday. According to James Goss and Patrick Sholl at Barrington Research, Viacom is showing momentum in its turnaround efforts. Paramount, which looks set to return to profitability in 2018 after two years of losses, had some genuine hits last year. Mission: Impossible-Fallout earned a franchise-best $791 million at the global box office and A Quiet Place earned $341 million globally, justifying a sequel.

While operational improvements at Viacom’s larger cable networks segment—which includes Comedy Central, MTV, and Nickelodeon—may take some time to show up on the company’s bottom line, Goss and Sholl believe that the stock is unfairly cheap. A 21% decline over the last two months overlooks the company’s turnaround progress, the analysts say.

On Wednesday, Barrington raised its Viacom rating to Outperform from Market Perform, and slapped a $35 price target on the stock, some 35% above Wednesday morning’s price of about $26. Viacom shares are up 3.2% in late-morning trading.

CBS investors are similarly overlooking improving fundamentals due to the overhang of its management turmoil, wrote Stephens analyst Kyle Evans in a report on Wednesday. Evans called CBS a “2019 best idea” and upgraded the stock to Overweight from Equal Weight. He left his price target unchanged at $58, but after a 25% decline in November and December, the stock has room to grow from a recent price of $45 a share. CBS was up 3.5% Wednesday morning.

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For Evans, a Viacom tie-up would actually be a negative for CBS, which has a higher-quality and more profitable business than its one-time corporate sibling. Instead, he sees CBS as an attractive acquisition target itself for a larger player in the media space, or even a tech giant hoping to beef up its over-the-top (OTT) streaming content. “We believe CBS could emerge as an acquisition target as the media landscape continues to consolidate and FAANG OTT options continue to disrupt big, fat, and overly expensive TV bundles,” Evans wrote in his report.

Mainly, he thinks that investor sentiment about CBS should become more positive in 2019, as the Moonves scandal and management turmoil fades.

That could allow solid results to shine through. According to Evans, CBS’ recent strong ratings put it in a good position to get improved pricing for its cable channels in TV bundles, while a ramping up of the 2020 election cycle means increased advertising spending. Any faster-than-expected subscriber growth in CBS’ streaming businesses—which includes CBS All Access and a stand-alone Showtime offering—would boost the stock further. The services are on track to hit a combined eight million subscribers and over $500 million in revenue in 2019.

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